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The Unintended Consequences of Tariffs

For Tim Hsu, a Taiwanese businessman who designs and sells modern lamps and ceiling lights predominantly to American customers, the news of a historic tariff hike came as a shock. His carefully crafted plans to diversify production away from China and invest in Cambodia were thrown into disarray after US President Donald Trump’s announcement. Hsu had invested in Cambodia, expecting it to be a safe alternative to China’s rising costs. However, Trump’s surprise announcement of a hefty 49% tariff on all US imports from Cambodia could undo years of hard work and investment.

"Should the tariff remain at 49%, we will be forced to pull our investment out of Cambodia," Hsu told CNN. This unexpected levy has left him unsure of his next move, casting a cloud of uncertainty over his future business plans.

Cambodia’s swift response, lowering its own tariffs on a range of American goods, including motorcycles and cars, has opened up negotiations, but the outcome remains uncertain.

Southeast Asia’s Struggles: A Region at Risk

For Hsu, pulling out is a relatively simple decision since his investment is still in the early stages. However, for many companies with established factories and thousands of workers in countries like Cambodia, Laos, Myanmar, and Sri Lanka, the tariffs are catastrophic. For more than a decade, these nations have benefited from the growing trend of global companies seeking alternatives to China’s increasingly expensive supply chains. Now, these economies face an unprecedented challenge.

Countries across Southeast Asia have relied heavily on low-wage, labor-intensive industries—such as garment production, footwear, and electronics assembly—to drive economic growth. This trend had been accelerated by the US-China trade war and the global pandemic, which pushed companies to shift operations outside of China.

However, Trump’s new tariff policies are targeting the very economies that have benefited from this trend. Economists are warning that the consequences for these nations, many of which are among Asia’s poorest, could be devastating.

Cambodia: The Epicenter of the Crisis

Cambodia, a country of around 17 million people, is particularly vulnerable to the new tariffs. The country’s economy has been largely built around manufacturing exports, especially garments and footwear. In fact, more than 37% of Cambodia’s exports are bound for the US, and apparel alone makes up over 43% of its overseas shipments.

This dependency on the US market means that the tariffs could disrupt the livelihoods of the over 1 million workers in the garment, textile, and footwear industries. With a minimum wage of just $200 per month, many of these workers, 75% of whom are women, could find themselves out of a job, unable to support their families.

Major global brands like Nike and Adidas have already shifted their production away from China to Southeast Asia to mitigate their exposure to the ongoing trade tensions. However, the new tariffs threaten to undo these gains, leaving both the workers and the broader economy at risk.

The Larger Economic Impact

Experts believe that Cambodia will be hit the hardest by these tariffs. As a key exporter of apparel and footwear, the country faces the possibility of massive job losses, production cuts, and economic decline. Casey Barnett, president of CamEd Business School in Phnom Penh, emphasized that the US's goal of bringing back manufacturing jobs is unachievable when it comes to low-skilled, labor-intensive industries like apparel production.

“The US cannot replicate these types of industries due to high labor costs,” Barnett said. “This tariff won’t bring jobs back home—it will just harm developing economies that depend on these exports.”

Cambodia’s economy, which has seen impressive growth in the last decade, is still fragile, and many fear that these new tariffs could reverse years of progress. According to Barnett, the loss of these exports would have devastating consequences for hundreds of thousands of workers, many of whom are young women trying to escape poverty.

The Wider Southeast Asian Impact

Cambodia is not alone in this crisis. Other countries in Southeast Asia, such as Laos, Myanmar, and Vietnam, have also been hit with tariffs of over 40%, with Laos facing a 48% tariff, Vietnam 46%, and Myanmar 44%. These nations are also heavily reliant on export-driven industries like garment manufacturing, and the new tariffs could cripple their economies.

Vietnam, for example, sent nearly 30% of its total exports to the US last year, making it highly susceptible to the tariff hikes. According to government data, these exports include textiles, footwear, and other low-cost, labor-intensive goods. As in Cambodia, the majority of workers in these industries are women, and they stand to be disproportionately affected by the job losses caused by the new tariffs.

The Geopolitical Game

Some experts argue that the high tariffs imposed on these countries are part of a broader strategy by the US to target China indirectly. By imposing steep tariffs on countries that host Chinese manufacturing operations, the US hopes to put pressure on these nations to curb Chinese investment.

Siwage Dharma Negara, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore, suggested that this policy is intended to counter China’s growing influence in global trade. However, this strategy may backfire, according to Edwin Lai, an economics professor at the Hong Kong University of Science and Technology.

Lai warned that by isolating itself with such high tariffs, the US risks pushing these countries closer to China, which could emerge as the leader in global trade. As the rest of the world moves toward freer trade, China is positioning itself to take advantage of the changing dynamics.

The Road Ahead: What’s Next for Southeast Asia?

Despite the challenges, many investors and business leaders in Southeast Asia are holding out hope that negotiations between Cambodia and the US will lead to a reduction in the tariff rates. Kevin Chang, founder of Stronghold Trustee in Cambodia, shared that many of his clients are adopting a wait-and-see approach, optimistic that a resolution will be reached.

“We don’t think these tariffs will be final,” Chang said. “We believe there will be a solution that benefits all parties involved.”

As negotiations unfold, Southeast Asia’s future remains uncertain. The tariffs are already having a devastating impact, and the broader geopolitical consequences could shift global trade dynamics in the years to come.

A Ripple Effect Across the Global Economy

Trump’s tariffs are more than just a trade policy—they represent a fundamental shift in the global economy. As countries like Cambodia, Laos, Myanmar, and Vietnam grapple with the fallout from these levies, it’s clear that the impact will extend far beyond these borders. While the US aims to bring manufacturing jobs back home, the reality is that these economies are deeply intertwined with the global supply chain, and severing those ties could have far-reaching consequences.

As the global economy continues to navigate the turbulent waters of trade wars, businesses and workers in Southeast Asia will continue to bear the brunt of these policies. The world will be watching to see if diplomatic negotiations can ease the pain and restore some stability to these vulnerable economies.

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